Innovation, informality, and firms’ growth in low-income countries

Despite the high profile of the issue in current policy formulations in low-income countries (LICs), there is little empirical evidence on innovativeness and firm performance in formal and informal establishments. This paper aims to fill this gap in the literature using a revised Crépon-Duguet-Mairesse (CDM) structural model to analyse data from a unique innovation survey of 500 manufacturing firms in Ghana. We found that innovation positively impact the labour productivity of firms, and learning instead of technical based innovations are the significant factor. The effect is significantly greater for informal establishments. We suggest that on the one hand innovation is a factor that developing informal firms may push them to the formal economy. On the other hand, surviving of some informal firms may be linked to their ability to innovate.